Oil hedging activity reaches record levels in October as traders take on market risks
Oil futures and option trading reached record levels during October as investors sought to hedge against the growing uncertainty caused by the ongoing war in the Middle East, and an upcoming bearish supply and demand forecast for 2025. This led to big swings in oil prices.
By locking in an oil price, hedging can protect producers from market volatility and reduce their risk. This can give traders the opportunity to make money during volatile times.
According to the Intercontinental Exchange, 68.44 millions barrels of crude oil were traded as futures and options in October. This is a record monthly volume that surpasses the previous record set in March 2020. Brent futures fell by about $30 per barrel due to the COVID-19 pandemic which slashed global oil demand.
CME Group reported that it had traded 58,132 weekly crude oil option contracts on October 18, a record volume for a single trading day.
Aegis Hedging's client base, which represents 25-30% to the total U.S. barrels equivalent of oil, had the most trades ever in October, up by about 15% over the previous record.
Jay Stevens is the director of Aegis Hedging's market analytics and fundamentals. He said that "bullish surprises" like possible attacks against oil infrastructure can cause market jitters and spur clients to action. Investors waited for Israel's response after an Iranian missile strike on Oct. 1. They were concerned that a retaliation might include strikes on Iran's oil infrastructure. Israel's strikes a few weeks later did not affect energy supplies and bypassed Iranian oil installations.
Analysts said that this reduced oil's geopolitical premium. Brent crude futures fell by about $4 per barrel on the next trading day.
Brent fluctuated between $70 per barrel and $81 in October. According to LSEG data, Brent crude futures dropped 17% last quarter while West Texas Intermediate crude fell 16%.
When futures prices are volatile due to geopolitical or other uncertainties, markets often look to options to manage risks in a more effective way, said Jeff Barbuto.
Brent Options traded on ICE in October exceeded the previous record of 6,02 million barrels set in April 2024.
SLOW DEMAND BALANCE While geopolitical conflict may pose a price risk upward, traders will also face a weak fundamentals forecast for 2025.
Matt Portillo, Tudor, Pickering, Holt & Co's analyst, said that West Texas Intermediate would average $65 a bar next year, and the downside could be as low as $50 a bar if the Organization of the Petroleum Exporting Countries (OPEC+), increases production in the coming year.
Peter Keavey is the global head of Energy at CME Group. He said that "the market is responding to supply and a generally sluggish balance in demand". He said that investors are increasingly turning to options markets as a hedge, citing a sharp 38% increase in the average daily volume of WTI crude monthly options traded at the CME.
In its third quarter earnings report, Coterra Energy reported that it had added new derivative contracts to its portfolio in October. The company has not hedged any significant part of its production until the end of next year.
On top of its existing 3,68 million barrels, the company has added 305,000 barrels to the WTI oil hedges that it holds for the fourth quarter in 2024. The company added an additional 4,205 million barrels to its WTI oil hedges.
Last month, uncertainty about when OPEC+ will unwind the most recent layer, a reduction of 2.2 millions bpd in output, further fueled producers' concerns and helped boost hedging activities.
Stevens, from Aegis, said that the outlook for 2025 has become bleaker due to projected oversupply. OPEC+ said that it had agreed to postpone its planned increase in oil production for December by one month. The group reported on Sunday that this was due to the weak demand, notably coming from China, and the rising supply outside of the group. (Reporting and editing by Christopher Cushing in Houston, Georgina McCartney from Houston)
(source: Reuters)
